This article details the process that was undertaken to convert the financing mechanism for publicly funded mental health residential programs in a large urban setting from nonincentivized agreements to performance-based contracts. The initial target for change was improving occupancy rates for residential services targeted to persons with serious and persistent mental illness. Improving occupancy rates enhanced efficiency such that 25 additional cents for every dollar spent on mental health residential services went to direct care. Challenges met in the process of effecting the contracting conversion of this expansive system are addressed. The importance of centralized gatekeeping, stakeholder involvement, and setting modest expectations are emphasized as keys to success. Although the system still has less capacity than client demand warrants, existing beds are no longer underutilized. Recent efforts to expand contracting targets beyond efficiency goals to include improved quality and effectiveness are also discussed. useofperfbasedcontracting.pdf